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NCR Proposed Fee Guideline – Attorney Fee

The NCR have issued a proposed fee guideline for updated fees for debt counselling. The fee guideline touches on legal costs for debt review.

The Proposed Fee Guideline

7. Attorney fee

This will cover (a) drafting of the Court application; and (b) Attendance at Court. The recommended amount is to be agreed upon with the attorney upfront and communicated to the consumer on application. Debt counsellors are advised to negotiate that the legal fee be aligned to the disposable income of the consumer where possible. This is to be charged and payable after completion of the restructuring process.

General

It is good to see that the National Credit Regulator (NCR) are being cautious in regard to trying to limit and dictate fees for attorneys. Attorneys are very particular about their fees and the limits. The NCR has no authority over attorneys and have recently rather been engaging with the various law societies about their members and how they handle debt review matters.

It is clear that the NCR want consumers to have a clear idea of what their legal fees will be. As a consumer, it is always good to know what you are going to pay (where possible) for a service.

It also seems likely based on the proposed time of payment that the NCR would like to see consumers actually getting the service they are paying for before they have to pay for it. This may be in an effort to prevent consumers from being taken advantage of by firms who never actually provide the legal services which the consumer is paying for.

Because many consumers drop out of the process in the second month (for some weird reason which just makes their lives much worse than ever) there have been many consumers who have paid legal fees only to never benefit from them (or the entire debt review which they started but failed to follow through on). Some firms report figures as high as 20% of clients like this.

What is interesting is to see that in this guideline that the attorney’s fees are closely related only with the start of the process unlike in the current guideline which is unclear about when and what these fes apply to.

 

Problems

Becuase each consumers matter is unique, when the process begins it is unknown how many accounts the consumer actually has, the legal status of each account, the possibility of achieving consent to proposals that have yet to be made, it is very difficult to know whether the matter will go to the Tribunal or the Magistrates court. All of these factors (and more) affect what the possible charges will/could be from the attorney. It is therefore hard to know upfront what fees will be (100%). At best it would be a rough guess.

Many Debt Counsellors have currently negotiated standard fee structures with attorneys as long as they supply them with all their cases. It might be argued therefore that losses on one consumer’s matter (in fees to the attorneys where they do lots of extra work) are somewhat offset by other cases where there is less work. Is this what is actually happening? Ask an attorney and they will hesitate to answer.

Ask an attorney to provide you with a service contract agreement and a quotation and you will have little to no success despite provisions of the CPA. Due to the nature of the service provider and the tricky nature of legal work they hesitate to make promises they cannot keep.

At present, many legal firms offer to do a debt review application for the equivalent of the consumer’s monthly debt repayment instalment amount and these are taken in month 2 of the process. Others charge a monthly retainer fee built into the consumer’s monthly budget. Still others have a shifting scale for consumers with different amounts of accounts or charge different fees dependant on if matters go to the NCT or a Magistrates Court.

It is often advantageous to get a consumers matter before court within the first 60 business days of the consumer applying for debt review. This provides additional legal protection from ‘termination’ abuse by uncooperative credit providers. Due to the changes proposed in this fee guideline there may now commonly be a 1 month payment holiday at the start of the process (R300 payment only). This may then mean that even if legal fees are commonly set aside in the month after restructuring (and reckless lending) fees are taken that the legal work will only commence outside of these ideal 60 days.

‘In most cases, the Attorneys want their fees set aside in their trust account before the work begins’

In most cases, the Attorneys want their fees set aside in their trust account before the work begins. This is because they run a business where unhappy clients tend not to pay after the fact if things don’t go their way (as can happen in any court matter). The proposed fee guideline calls for upfront quotes and payment only after the completion of the restructuring process*. What does this mean? Is this after 5 years when the debt is paid in full (probably not)? Does this mean once the court or tribunal makes the order restructuring the debt? What if the order is not granted? Does that mean the attorney is not to get money for all the work they would already have done? What if the consumer leaves the process after the court work has commenced but before an order is granted (some courts delay and delay for a variety of factors)? All the attorneys that Debtfree spoke to said they will not be prepared to wait for payment after the fact and want payment set aside as soon as possible before they commence work.

‘Will the credit providers be happy to suddenly have their repayment skipped or reduced in that particular month?’

If payment of attorneys fees is only to happen once a court order is granted (if that is what the guideline is referencing) then what month will that be? It is important since that is the month in which fees would be taken from the consumers monthly repayment distribution. How does the Debt Counsellor factor that in while preparing the repayment proposal to the credit providers and the court? Which month will that be? How does the Debt Counsellor know what the bill will be (unless agreed and fixed up front some how)? Will the credit providers be happy to suddenly have their repayment skipped or reduced in that particular month?

‘pushing up reckless lending investigations and the obvious need for each credit provider to oppose or attend each matter, there are going to be exponentially higher legal fees’

With the proposed guideline (and the NCR Task Team Report Guideline) pushing up reckless lending investigations and the obvious need for each credit provider to oppose or attend each matter, there are going to be exponentially higher legal fees. For example, one attorney we spoke to said consumers could expect a minimum legal fee of R10 000 if all matters involve reckless credit. This, probably unintended consequence of the guideline, will not only reduce the likelihood of consumers entering debt review (and Debt Counsellors being able to promote debt review) but will also leave consumers exposed to higher fees than ever. It will also (in the case of the “average” consumer paying R2500 having 4 months worth of interrupted payments to their creditors at some unidentifiable, unpredictable point in the process when the court order is granted (if this is when the fee would indeed be charged).

‘The fee guideline is quiet about subsequent legal costs which may arise during the process’

The fee guideline is quiet about subsequent legal costs which may arise during the process. For example, to do recessions and amendments to the court order which may result due to the consumer leaving the process or the annual review of the clients situation resulting in a new payment proposal. It also does not cover attorneys fees when defending matters at high court (for vehicle repossessions for example) which may form part of the needed legal services during the lifespan of the debt review (which may be 5 years or longer). It is quiet on possible legal action at the NCT to force credit providers to supply updated statements or settle statement disputes (such as end balance differences).

 

Solutions

It might be best to acknowledge these fees will happen but are hard to predict.

Perhaps the guideline should say that legal costs will apply and these are to be discussed with the attorneys or Debt Counsellor in advance.

Perhaps the guideline should encourage the Debt Counsellor or attorney to disclose probable fees (based on certain scenarios).

The guideline should provide some guidance on what happens when legal fees arise half way through the process. This may guide credit providers in how they react to unexpected legal costs which mess with the repayment plan.

The guideline could encourage any legal or attorneys fees to be paid into the Attorney’s trust account and set aside for legal costs. This could then be done close to the start of the process rather than some random point during the process. Unused funds (if that ever happens) should be returned to the consumer at some point.

 

 

 

 

* Debt Counsellors are not empowered to restructure debt. They can only propose restructuring to a court or the NCT which can then restructure the debt repayments.